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A relatively quiet night of trade in the currency markets punctuated by some profit taking in high beta currencies after the euro, the pound and the Aussie all rallied strongly yesterday as risk appetite continued to dominate trade. Today the mood has been t more somber with US equity futures pointing to a lower open despite the fact that Goldman Sachs reported better than expected results yesterday after the close of US equity session.
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The pound lost more than 200 points by early London trade after the currency came under assault on multiple fronts as the economic fundamentals of the UK economy deteriorated further, UK jobless rolls swelled by 138.4K versus expectations of 84.5K as the overall unemployment number crossed the critical 2 Million mark. The claimant count rate increased by 4.3% versus 4.0% forecast while average earnings including bonus dropped from 3.2% the month prior to 1.8% in January. Additionally the unit was hurt by an earlier report from IMF that suggested UK recession could last well into 2010.
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UK jobless rolls swelled by 138.4K versus expectations of 84.5K as the overall unemployment number crossed the critical 2 Million mark. The claimant count rate increased by 4.3% versus 4.0% forecast while average earnings including bonus dropped from 3.2% the month prior to 1.8% in January.
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TRADE IN PROGRESS...on multiple bullish pattern convergence establishing 2.11 a critical support
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Markets are once again entrenched in a fear induced environment. Global equity markets are spiraling downward on continued disruptions in the stability of the global financial system. The promise of stability is nowhere to be found, as situations are only worsening despite continued governmental efforts. The concerns over the financial sector in particular have added to investors fears. Between the British nationalization of Lloyds Banking Group and AIG’s proposal for another bail-out, the survivability of financial companies is in question. Currencies have reacted with a determination on dollar strength. As the yen continues to lose its status as safe haven, the availability of a risk-free environment is almost completely limited to the United States. The dollar advanced against the Euro, Pound, Yen, Canadian dollar, Australian dollar, and New Zealand dollar.
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Cable has fallen a remarkable 400 points at the starts of this week’s trade hitting lows not seen since the end of January. What’s behind the sell off and is it likely to continue? Tonight’s drop in the pound was triggered by yet more bad news from the UK banking sector. Shares of Lloyds PLC tumbled 14 percent after UK’s biggest lender ceded corporate control to the government in return for state guarantees covering more than $367 Billion of assets.
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Both euro and pound recovered off their North American session lows in a quiet rangebound session that carried very little event risk on the calendar. However, the star of the show in currency market tonight was the Australian dollar which singlehandedly revived risk appetite after the RBA surprised traders by keeping its overnight cash rate at 3.25% instead lowering it by 25bp as expected.
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The euro consolidated near the 1.2700 figure in early European trade boosted by better than expected German Consumer confidence numbers while pound tried to shrug off RBS news which reported the largest corporate loss in UK history and announced that the government may take up to 95% stake in the company.
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The Q4 revision of UK GDP proved to be better than the dour consensus estimates of -1.6% printing at -1.5% but offered little help to pound bulls today as the pair sold off towards the 1.4500 handle in the aftermath of the release. Although the results were nominally better than forecast skepticism abounded in the currency market that these figures will not mark the lowest point in the UK economic cycle.
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Dollar steadily lost ground during the Asian and early European sessions today as bargain hunting and short covering helped drive both the euro and pound higher. After coming close, but failing to take out the psychologically important 1.2500 level yesterday, EUR/USD catapulted higher on a buy recommendation by US investment bank that cited excessive bearishness in the EZ and the Eastern European economies.
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With US equity and bond markets closed for Presidents Day, trading was relatively quiet for currencies. The G7 meeting did not lead to any fireworks but the dollar did gap higher against all of the major currencies except for the Japanese Yen at the Asian open on Sunday.
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The Asian equity markets reacted negatively to the news that the US stimulus package was ready for passage as traders grew increasingly skeptical about the bills efficacy to help revive the US economy. Most Asian equity bourses were lower by more than -2% and the European markets followed suit with declines of more than -1% in early London and Frankfurt trade.
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Euro and pound were generally range bound in early European trade as the currency market awaited rate decisions from both the BoE and the ECB due 12:00 and 12:45 GMT respectively. With economic calendar essentially barren trading was likely to remain choppy as EUR/USD tried to hold on to the 1.2800 level while cable consolidated around 1.4400.
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In what may be a small glimmer of hope, UK PMI Services printed better than forecast at 42.5 against 40.3 suggesting that UK economy may be finally showing some signs of stabilization. This was the third consecutive PMI reading this week that surprised to the upside lending more credence to the sterling bullish view that the worst of the UK contraction may be over.
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With most of Asian and Australia out on holiday, the liquidity starved conditions in the currency markets created some exaggerated movements in both euro and pound on the first trading day of the week, as both units fell hard at the start of Asia trade only to stabilize and recover on better risk appetite as the night progressed.
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UK GDP data printed much worse than expected sending pound to fresh multi year lows as the report confirmed that the country has officially entered into its first recession since 1991. The UK GDP showed a contraction of -1.5% versus -1.2% expected as the full impact of the collapse of global capital markets has finally hit the finance driven economy.
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The drop in the GBP/USD at the start of this week has been nothing short of astonishing. In less than 48 hours the pair erased more than 1000 points off its price depreciating by more than 6% against the dollar. Although cable has been in decline since the turbulent markets of last fall, this latest freefall carries a whiff of true panic about it as markets fear that that UK government spending schemes to rescue the country’s ailing banking sector will put unsustainable stress on the Treasury.
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After climbing back to 1.4000 in early Asia session on profit taking by the shorts GBP/USD tumbled for the third night in a row as traders treated the currency as though it was covered in radioactive waste. An article in London Times which basically called for selling every UK asset was the trigger for the latest downdraft, and the overnight economic data did little to bolster the case of pound bulls.
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Not a pleasant start of the week for pound bulls with cable crushed on the open of London trade, falling nearly 300 points from the day’s high in response to the second version of the UK rescue plan of its banking sector. The plan announced by UK Chancellor of Exchequer Alistair Darling proposed creating an insurance scheme to underwrite the toxic debts on the books of UK banks. The scope of the program could reach 50 Billion pounds. Additionally UK authorities increased the government stake in RBS to 68% from present 58% share. UK PM Gordon Brown went out of his way to criticize the RBS management, noting that the bank was wholly irresponsible it its investment decisions and that most of its losses came from its exposure to US mortgage backed securities as a result of RBS’s acquisition of ABN-Amro.
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The pound was decimated at the start of weekly trade today dropping more than 200 points off its highs as traders absorbed the details of new UK government rescue package of the banking sector.
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Bank of England dropped the benchmark UK interest rate to 1.5% easing by 50bp as expected. The Monetary Policy Committee noted that the sharp drop in the pound provided additional stimulus to the UK economy tempering the need for more drastic rate cuts at the present time. The Central Bank acknowledged the severity of the UK recession stating that business and consumer confidence have declines markedly while noting that output is likely to drop sharply in the first half of 2009.
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With no US economic data on the calendar today, the dollar weakened against every major currency except for the British pound. Trading continues to be very thin with commodities being the only products that are really moving. The tensions in the Middle East have driven oil and gold prices higher. US stocks also gave back Friday’s gains and remained contained within its week long trading range.